Swallowing Thames makes RWE a world player in water market

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Thames Water is to become the spearhead for RWE's assault on the international water market after confirmation yesterday that the German utilities group is swallowing Britain's biggest water company for £4.3bn.

Thames Water is to become the spearhead for RWE's assault on the international water market after confirmation yesterday that the German utilities group is swallowing Britain's biggest water company for £4.3bn.

Although the takeover is not expected to be completed until November, RWE's brokers, Merrill Lynch, yesterday swooped on the market, buying 20 per cent of Thames shares to ward off any potential rival bidder.

The deal makes Thames the fourth largest UK water and sewage company to fall under foreign ownership since privatisation 11 years ago. Northumbrian, Wessex, and Hyder are already controlled by French or US companies whilst a number of smaller statutory water companies, such as the Vivendi-owned Three Valleys, are also foreign-controlled.

Following the Thames takeover, the cash-rich RWE will become the world's third biggest water company after the two French groups Suez Lyonnais des Eaux and Vivendi, with 34 million customers and operations in 18 countries.

Before the deal, RWE had water interests in only Germany, from where it supplies the capital Berlin, and Hungary and Croatia. Buying Thames will bring it a presence in the Far East, Australia, Latin America and, most significantly, the US, where Thames' $950m takeover of the New Jersey water supplier E'Town is also due to be completed in November.

"Thames gives us the scale and the technical expertise to become a worldwide player," said RWE's chief executive Dr Dietmat Kuhnt. The German company's enlarged water division will be run from London by Bill Alexander, the chief executive of Thames and RWE is keen to retain the rest of Thames' management.

Dr Kuhnt would not be drawn on the level of resources Mr Alexander would have at his disposal to expand the RWE empire but he added: "There is no financial limit provided the project is good. We will develop step by step. We have the funds and if there are opportunities we will take them."

The worldwide water market is developing rapidly as more countries privatise their networks or put municipally run operations out to tender. The revenues of private sector water and waste companies are forecast to grow from 90bn euros last year to 430bn by 2010.

In the US alone, investment in water and waste water infrastructure is expected to exceed 300bn euros over the next 20 years whilst the market for contracting out the operation and maintenance of networks is growing at a rate of 32 per cent a year. Revenues from contracting are expected to increase from 1.2bn euros last year to 3.4bn euros by 2004.

So the scope for growth is huge. Mr Alexander insists that, on its own, Thames could never have tapped the market in the way that will be possible under RWE's ownership. "Even if we had been allowed to merge with another UK water company we would have struggled to compete," he said.

With the backing of RWE, finance is unlikely to be an obstacle. The Germany company is buying Thames for a multiple of 17 times its earnings compared with the multiple of 11 on which other companies trade and taking on £3.5bn of debt, increasing the cost of the transaction to £6.8bn. And yet Dr Kuhnt said the deal would be earnings enhancing from day one, even after amortisation of goodwill.

It is clear, then, that RWE has its sights set on global expansion, developing water as one of its four key divisions alongside electricity, gas and waste management.

It is less clear what RWE's wider ambitions are in the UK. Dr Kuhnt will not say whether he would like to add a UK electricity business to his stable. And yet it is known that RWE looked at buying Hyder, the Welsh water and electricity utility, before switching horses and approaching Thames with an offer four weeks ago.

Furthermore, the RWE/ Vivendi joint venture that provides the water supplies to Berlin also plans to start offering gas and electricity whilst RWE founded an electricity trading company, RWE Energy Trading, in London two years ago.

The other unknown is the extent to which RWE's takeover of Thames will prompt a wave of foreign bids for Britain's remaining water and sewage companies. Industry watchers are sceptical of the scope for corporate action, notwithstanding the sharp rise in the share prices of other suppliers.

Mr Alexander, for one, thinks it unlikely we will see the UK water industry swallowed up in the same way as the electricity sector was for the simple reason that most of the big players such as Suez and Vivendi already own UK water companies and would find it difficult to expand further whilst others, such as Azurix, the owner of Wessex, are thinking of baling out. "I don't think there are many buyers around who wouldn't have to go through a lot of regulatory hurdles," he added.